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Friday, July 30, 2010

Business angel club development in Russia: practical experience (Part 2)

Dr. Eduard Fyaxel, professor, head of the Marketing and Venture Management Chairs of the state Higher School of Economics in Nizhny Novgorod, president of the Start Invest business angel association continues sharing his ideas and worries regarding financial support of Russia’s innovation.

“Give him money, he’s a good guy!”

We’re not philanthropists, of course, and monetization is our number one priority. We realize, however, that we have to create and develop projects before we gain from them. It takes eight-to-ten years to accomplish, longer than the classical three or five, as a business angel nurses his project from the very beginning—typically from the pre-seed stage that normally requires other mechanisms (such as ‘three F’ or grant programs). 

I collaborate with the Bortnik Fund as a member of its panel of experts. Out of the nine-man panel, six are scientists and only three represent the world of business. And the following remarks can be heard, “To deny Mr. X financing? He’s such a prominent scientist—how can we?” Or, “You know what? It is very interesting from a scientific standpoint.” And those people discuss projects that need to be commercialized. 

Until the panel composition is reversed, or—even better—instead of scientists the panel invites three academic administrators, the Bortnik Fund will keep up its current ‘efficiency’, with just one successful project out of twenty approved. Improving it to one out of five could be quite possible.

Innovators vs. beekeepers
It’s a mistake to think we have lots of projects. Whoever says this speaks of fundamental research rather than projects. Marketable ideas are scarce; the quality of project applications is pitifully low.

Based on data from our four related government departments in this region and own survey we have found out that there are about 200 truly innovative SMEs in Nizhny Novgorod—a pathetic number for a city where there should be thousands of such small businesses. 

Unlike innovation companies, local authorities would find it much easier to tell you how many beekeepers or gardeners this region has.

It’s sad statistics. Companies tend to multiply but few survive beyond their third birthday because the ‘death valleys’ with their dearth of early stage financing usually take their heavy toll.

On an octopus and a ‘private matter’

Another problem is what I call a communication, or translational, barrier. It resembles an octopus whose tentacles move in different directions, thus tearing its body asunder. 

An investor has his view; an innovator has his. A project manager or businessman may or may not exist at all; even if he does, he acts more like a many-headed dragon peering into all the four corners of the earth at once.
They can’t understand one another; all they can think of is how to avoid being bamboozled. Being quick enough to dupe one of the other two in the process is regarded as a stroke of luck. 

A serious problem is deep-rooted mistrust that university and research institute administrators have for the very concept of commercialization. The RF Academy of Sciences commands them to do fundamental research, while whatever is accomplished outside that task is a private matter, not academia’s, and should not be part of academic activity.

In a big hi-tech cluster in the region’s south, in Sarov, we can see innovations flourish. Why? Because its base entity, the RF Nuclear Center, doesn’t prevent inventors who need funding for their ‘private matter’ from seeking capital from business angels. And it’s good those angels fly to help; otherwise the inventors would have nowhere to go.
When I was in Finland, I wanted to know who worked at a local business incubator as residents. I was sure those were young people, like here. I was mistaken; I saw some imposing forty-year-old men with years of experience at large firms. They had come up with project ideas but their employers rejected those ideas, forcing the innovators to quit their jobs and head for the business incubator. Such were more than 70% of all residents. 

So what happens in Sarov is normal.

Meanwhile, scientists in Nizhny Novgorod keep doing what their research chiefs tell them to.

‘Off the wall’ entrepreneurs as a species

There’s yet another problem: no professional environment, in which venture managers could be trained.
To my mind, there are three categories of managers. There are managers at big companies; they are useful but serve their specific purposes like bolts in a mechanism. 

There are owners of small businesses (other than innovation). Small companies in Germany are a classical example. A family has been running a barroom or a store for decades and generations; their kids will carry on. They make enough to pay bills and live comfortably and find it appealing. Their business doesn’t grow; it gets passed on from father to son ‘as is’. 

And finally, there’s a ‘nuts’ category, a kind of ‘off the wall’ entrepreneurs who can hardly tell you what drives them. Want to find out how much they earn? Ask one of those eccentric business angels, and that oddball (sometimes popularly resented as a ‘bloodsucker’) will go about telling you in detail how much… he has invested. He may really not know how much he has made, and this is of little concern for him! And why worry? He has something to eat and drink, and he can do what he likes and believes in.

The word ‘entrepreneur’ is almost obscene in this country. Elsewhere in the world it goes with an enterprising person whose goal in life is to create new things. His work is his life. Get him to retire—and he’ll wither away within months. 

This is a peculiar species. But they have to be trained. Some can stir up their abilities by themselves, while some others can’t. Venture managers must be coached professionally. Until there’s a proper training system in place, even best projects may fizzle out before they find a market. 

As an investor a business angel is team-oriented. He invests in people capable of shouldering a project. But to do that, he needs training as well.

Tuesday, July 20, 2010

Business angel club development in Russia: practical experience

Dr. Eduard Fyaxel, professor, head of the Marketing and Venture Management Chairs of the state Higher School of Economics in Nizhny Novgorod, president of the Start Invest business angel association

Before I talk about our Association’s experience, I believe it’s important to make it clear who venture investors are.

A lot of horns are locked over the issue. However, most controversialists agree that venture funds are venture investors. Business angels and private equity investors are also viewed by many as such; maybe less convincingly, though. (By the way, there’s a huge difference between these two species.) And finally, corporate VC investors; debaters aren’t unanimous here, either, but personally I tend to consider then venture investors.

Out of this understanding of who’s who (and where) in the VC world comes the concept of a ‘death valley’ for potential projects: advanced stages of project development receive the lion’s share of funding while the seed and start-up stages are financially famined. And for them business angels provide the much-needed lifeline.

Between alleged sectarianism and partnering with the Russian Venture Co.

Our not-for-profit partnership, the Start Invest business angel association, was set up in 2006. It took us time and tremendous efforts to register. Domestic registration agencies found the concept of business angel extremely suspicious; we had to get screened by a local theology expert panel for alleged sectarianism. Some officials simply called us cons plotting to dupe someone.

But we did it in the end. In the very first year of existence, we became a co-founder of the Russian Business Angel Network (RuBAN); in 2009, we helped set up the Russian National Business Angel Association (RNBAA). Earlier this year Start Invest was selected a Venture Partner for the Russian Venture Company’s Seed Fund.

We were not trail-blazers; business angels had tried to pool efforts before, too. In 2003, two such networks were established in Moscow. But they positioned themselves as national alliances. We in Nizhny chose a classical path by building a regional association of business angel investors. From the very beginning we would say that such organizations should be mushrooming across the country, to be later incorporated in a national one and further on into the European business angel community.

I travel from region to region very often; I have to explain and tout the concept, campaigning for the establishment of more alliances. As a result, several regional associations have sprung up.

“Business angels, alongside killers, are serial”

In this country, people have historically had a bias in favor of tapping high-priced oil or gas and ensuring 100% profitability. Hi-tech projects? Venture business? Bullshit! In earlier years any endeavor was venture business. And people enjoyed ‘sticking a cane’ in the ground and watching a ‘tree’ grow out of it right away.

But now, in the aftermath of the financial crisis, I think our time has come.

On the one hand, venture funds have seen their financing dried up, which is pretty bad. On the other hand, there emerge a lot of people who have cashed in their assets and today can’t invest in ‘traditional’ businesses as there are few niche markets to pay as handsomely as before.

And now, their money made wherever, those people are eyeing hi-tech segments, which is good. The business angel movement must be a mass one. In the U.S., between several hundred thousand and a million active business angel investors were reported in prior years with projects worth as much as $30-50bn, according to diverse sources. In Europe, about a hundred thousand business angels have been counted.

I’ve seen reports here in Russia that domestic business angels invest up to $250m a year. Idle talk; a maximum $5-10m! PRIVATE EQUITY investment could indeed hit $250m, but those are not angels’. This is about one buying a company and investing in it. A typical PE investor, like a beast, may grab a ‘morsel’, take it to his ‘hole’ and ‘chew’ it for a long time. Such an investor is not serial; whereas business angels—alongside innovators and killers—ARE serial.   

For a business angel, as well as a venture fund, to exit a project in the right time and finance many more is critical because statistically, only two out of ten investments are successful. Those trained and experienced in this normally have more than a dozen projects in their portfolios, which is very professional.

A club of the like-minded

Our Association now includes ten members, and they may be viewed as differing from ‘classical’ business angels. Each has behind him a team of dozens or hundreds of professional ‘innovation cultivators’.

The Association has been built as a club for the like-minded. Our mission is the pooling of resources; not only monetization but also mutual enrichment through sharing opinions and expertise. We coach innovative entrepreneurs free of charge; we help them prepare business plans, assist them in seeking investment from other sources; we also act as partners for other investors, including venture funds. The scope of our activity is pretty broad.

The efforts have been appreciated. Last year I was awarded as Russia’s Best Business Angel Group Leader and nominated for participation in the 2010 Istanbul competition held by the European Business Angel Network this past April.

A missing link required

We are open for collaboration with anyone willing and doing something to make Russia an innovation economy. The Russian Venture Investor Association operating since 1995, for one; or Quadriga Foundation set up in 1993; the Bortnik Fund is another example.

But things didn’t pan out well enough all the time. I would often argue we didn’t have real private investors and there was a missing link. They wouldn’t believe me. Now they have become believers; they understand that an innovation economy cannot be created without business angels.

Elsewhere in the world the state is a sizable helper for business angels; investors are aided in the setting-up of organizations, in taxation. In Russia, investing in a venture project entails ‘triple’ taxation.

Russian business angels are only making their first big move these days. There are no more than two hundred of those who realize who they are and what they want and need. Until they add up to tens of thousands, the current gap is impossible to bridge.